Arabia Watches Warily as Yemen Marches Toward Democracy : Mideast: Its freewheeling policies have sent shock waves through the region. The West also is concerned.

SANA, Yemen — There was little to prepare this land of volcanic peaks and sand-swept villages, once the arid domain of the Queen of Sheba, to lead Arabia on the road to democracy.

The narrow streets are still filled with men who thrust curved daggers in their belts. The tribes of the north even now wage occasional conquests from hill to rocky hill. Ancient dhows still call on the busy seaport of Aden. And politics and business, in the manner of eras past, unfold in closed rooms as tobacco is puffed in narghiles and sweet tea is sipped.

But the end of the Cold War has left traces even here in the remote reaches of the Arabian Peninsula. And in a desert mirror of the unification of Germany, the newly put-together Yemen has become the most vigorous democratic experiment in a land of sultans, emirs and kings who have for centuries resisted the ballot box.

Upcoming parliamentary elections in the fall--Yemen's first since the free-market north merged with the Marxist south in 1990 and a new constitution allowed political parties, free speech and a free press--have sent shock waves throughout the Persian Gulf. Conservative monarchies in the region fear that Yemen's new, freewheeling politics could unleash an unstoppable tide toward multi-party politics.

The alarm bells have extended throughout the Middle East and beyond to the West.

There have been protests from Arab embassies, and the United States and Britain both have drastically reduced aid to Yemen to display displeasure over its friendly relations with Iraq (which began with Yemen's 1990 U.N. Security Council vote opposing the use of force against Baghdad) and reports that it is harboring a training camp for militant Islamic fundamentalists.

But Yemen, a tiny country that defiantly threatened to shoot down American planes that strayed too close to its shores during the Persian Gulf War, has used its alienation from its neighbors to launch a political and economic development program that could make it a self-sufficient oil exporter, the most populous nation on the peninsula and potentially one of the most influential.

"Since the Gulf War, we have been cut off, but sometimes things that are bad turn out to be good," President Ali Abdullah Saleh said last week. "Such a situation pushed us to depend on ourselves. In the last two years, we have been able to speed up our exploration of oil, for example. We still need investment for this, of course, but we are aspiring now to exploit our own resources. We still appreciate the previous support from our Gulf brothers, but we are not going to continue to beg."

Unification of the two feuding Yemens in May, 1990, smoothed the way for new oil exploration along its borders. Analysts now predict Yemen could export 600,000 barrels a day in three to four years, putting it in the league of neighboring Oman, a minor-league Persian Gulf producer. Yemen also soon may be able to exploit its substantial gas reserves.

The prospect reportedly has alarmed neighboring Saudi Arabia. The Saudis worked vigorously to impede the Yemeni unification that left a populous democracy on its borders; they now appear to be seeking to slow development of Yemen's fledgling oil industry.

Renewing age-old border conflicts with its southern neighbor, Saudi Arabia in recent weeks notified three major oil companies exploring in Yemen that their tracts are in Saudi-claimed territory. The new border disputes have reportedly halted some exploration in the Red Sea.

Last week, Riyadh shocked Sana with a letter to the Yemeni government, from Prince Bandar ibn Sultan, Saudi Arabia's ambassador to the United States, extending Saudi land claims deep into the heart of Yemen; the territorial claims extended as far south as the Hunt Oil concession in Marib. That is the site of the home of the Queen of Sheba, one of the Seven Wonders of the Ancient World, and turf that Yemenis hold dear.

The Saudis' land claims followed their effective expulsion of 850,000 Yemeni workers during the Gulf crisis. That action, coupled with similar moves in other Gulf countries, cost Yemen up to $1.1 billion in lost remittances. It left its economy, at least until oil production picks up, in ruins. Unemployment now stands at 27%; there are 700,000 Yemenis out of work; inflation is approaching 60%.

Yemeni officials and analysts say that Saudi Arabia's real worry, more than a year after the Gulf War's end, is not solely focused, say, on any Sana-Baghdad ties.

Instead, the Saudis' chief concern can be found, for example, in underground cassettes of Yemen's vigorous parliamentary debates and its opposition party newspapers; both have begun circulating in Jidda and Riyadh, where Saudi King Fahd, like most other Gulf monarchs, has resisted calls for multi-party elections and has declared that democracy is not compatible with Islam.